Tuesday, January 28, 2014

As I have done in the past, I like
to post a non-political, realistic version of the real State of the Union, just
in time for the Presidential summary. Generally, I think that a few
graphs give us the general idea of what has happened over the past year since
the last address. In this posting, I'll look at two main issues; income inequality and the federal debt and present a few graphs that illustrate the real state of the union.

The President has recently been
focussing some of his efforts/talking points on income inequality. To that end, here is a graph showing the share of labor
compensation in GDP, telling us how much of the nation's total income is going
to laborers instead of capital-holders:

The 2011 level of 62.2 percent is
just above the lowest level seen since 1947 that was seen in 2010 and is well below the level of 65.4
percent in 2000. To at least some degree, the decline can be attributed
to increased competition from imports; as an industry faces greater competition
from imports, the share of income going to labor drops. There's nothing like sending jobs overseas!

In contrast, here is a graph showing the increase in after-tax corporate profitability since 2000:

Since 2000, corporate profits have
risen from $529 billion to $1.7087 trillion in the third quarter of 2013, an
increase of 223 percent. That's a compounded annual growth rate of 9.4 percent, more than twice the rate of inflation.

Here is a graph showing the growth
in the share of corporate profits in GDP since 2000:

The corporate profit share of GDP
has risen from under 5 percent in 2000 to its current level of 10.1 percent,
more than doubling over the 13 year period. Interestingly, as shown on this graph, the corporate
profit share of GDP is now very close to its highest level since 1947:

These graphs show us that corporations have benefitted over the past 13 years while laborers have not. The White House definitely has its work cut out on the issue of income inequality.

Let's switch gears and look at the current federal public debt situation. Here is a graph showing the growth in the
total federal public debt since the President Obama's first year in office from data on the Treasury's Debt to the Penny website:

When President Obama did his first
State of the Union address, the United States had $12.302 trillion in federal
government debt. This year, that figure will have risen to $17.261
trillion, an increase of $4.959 trillion or 40.3 percent since his first speech
to the nation.

Here is a graph showing the ratio of publicly
held federal debt to GDP since 2000:

Between the beginning of 2000 and
the middle of 2007, the debt-to-GDP ratio hovered between 60 and 62 percent.
This ratio has risen alarmingly since the beginning of the Great
Recession, and is now sitting at 98.97 percent, just below its peak of 101.4 percent
in the first quarter of 2013. To say that the current debt level is in
the danger zone is an understatement. Keep in mind that part of the levelling off in the debt-to-GDP ratio is due to an expanding economy and part is due to cuts in spending, thanks to sequestration. If economic growth begins to slow down or the economy begins to contract, unless Washington makes meaningful cuts to spending, the debt-to-GDP ratio will once again begin its march toward the heavens.

Lastly, there is one key factor that is helping Washington reduce its overall expenditures, a factor that is likely to be transient if the Federal Reserve has its way. Here is a graphic showing
interest payments on the debt in billions of dollars and as a percentage of
total federal outlays:

While the current level of interest payments on the
debt are low by historical standards, this graphic shows why:

With average interest rates on the
debt at 13 year lows, one can only imagine how quickly the fiscal situation
could become critical when interest rates rise back to their 13 year average of
5 percent. That would push annual debt interest payments up to the highest levels ever seen, straining Washington's ability to reduce both deficits and the growth rate of the federal debt.

While the White House uses the State of the Union address to pat itself on
the back for its accomplishments and makes a few motherhood statements about
where it wants to head, a few graphs can easily tell us where Washington has
failed and how much work lies ahead.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.